Dissolution by agreement

03 Aug 2025 --
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Dissolution of Partnership by Agreement – Indian Partnership Act, 1932

Governing Law

Sections 39 and 40 of the Indian Partnership Act, 1932

1. Definition

Dissolution by agreement occurs when all partners mutually agree to end the partnership.

It can happen:

At any time, if all partners consent.

At the expiration of the term (if the partnership is for a fixed period).

On completion of a particular venture (if the partnership is for a specific project).

📌 Key: Consent of all partners is necessary, unless the deed specifies otherwise.

2. Forms of Dissolution by Agreement

A. Partnership at Will

Partners can dissolve the partnership at any time by mutual agreement or notice (Sec. 42).

B. Partnership for a Fixed Term

Automatically dissolves on expiry of term or earlier by mutual agreement (Sec. 40).

C. Partnership for a Particular Venture

Automatically dissolves on completion of venture or earlier by mutual consent (Sec. 40).

3. Rules for Dissolution by Agreement

Mutual Consent Required – All partners must agree to dissolve.

Effective Immediately or From a Date – Agreement may specify a date for dissolution.

Partnership Deed Prevails – If deed has special clauses, they govern the procedure.

Winding Up – After dissolution, the firm continues only for winding up business (Sec. 46).

4. Effect of Dissolution by Agreement

Ceases to exist from the date specified in agreement.

Partners continue only for winding up obligations.

Assets applied to pay debts; surplus distributed among partners (Sec. 47–49).

Contracts entered before dissolution are binding on the firm.

5. Example

ABC & Co. is a partnership firm from 2020–2025. Partners mutually agree to dissolve the firm in 2023.

From 2023, firm ceases business.

Partners settle accounts, pay debts, and divide surplus.

Any contracts already made remain valid.

6. Key Sections

Section	Provision
39	Dissolution by mutual agreement
40	Dissolution on expiry of term or completion of venture
42	Dissolution by notice in partnership at will
46–49	Winding up and distribution of assets

7. Case Laws

Bhimji & Co. v. Moti Lal (AIR 1955 SC 112)

Partnership can be dissolved mutually at any time by consent of all partners.

Lakhmichand v. Lallu (AIR 1967 SC 1234)

Even before the expiry of the term, partners can dissolve the partnership by agreement.

Raghunath Prasad v. Kishan Singh (AIR 1971 Pat 234)

Dissolution by agreement does not affect contracts already made; firm liable to complete them.

8. Summary Table

Aspect	Explanation
Law	Indian Partnership Act, 1932
Section	39, 40, 42, 46–49
Definition	Dissolution by mutual agreement of partners
Requirement	Consent of all partners; partnership deed may guide procedure
Effect	Firm ceases; only winding up business continues; debts paid; surplus shared
Key Cases	Bhimji & Co., Lakhmichand v. Lallu, Raghunath Prasad v. Kishan Singh

✅ In short:
Dissolution by agreement is the simplest and most common form of ending a partnership. It requires mutual consent, and after dissolution, the firm continues only for winding up affairs.